Some years, a company might not record any earnings
but could still be a good investment. There might be industry-wide
problems. Or the company might be going through a period of rapid
expansion or new product development, causing expenses to eat
up earnings. In cases like these, analysts often use sales numbers
as a better indicator of a company's future success. The logic
is that if sales are strong and growing and the company is otherwise
healthy, earnings may be just around the corner.
To calculate the
price-to-sales ratio
(P/S
or
PSR)
analysts divide the company's
market capitalization
—the current share price multiplied
by the number of existing shares —by its past year's total
sales, also listed as revenues. Some analysts also subtract debt
from the market capitalization, to examine how much debt a company
takes on in its efforts to increase sales.
Room to grow
Often you won't find the P/S multiple in a report
at all. Instead, you'll find sales results for the year and estimates
for the future. Analysts concentrate on sales trends by comparing
the current quarter's sales to the same time period from a year
ago.
2Q 2002
2Q 2003
% Change
Sales
5,000
5,150
3%
Analysts also compare sales to expectations, such as in the example
below, which links the analyst's forecast for the quarter with
the actual results. Here, the company's actual sales missed the
analyst's mark by 5%.
2Q 2003 Forecast
2Q 2003 Actual
Variance
Sales
5,400
5,150
-5%
What kind of sales growth is significant? Many
analysts look for companies posting double-digit or higher increases
—in other words, more than 10% growth — but may expect
more or less depending on the company's age, size, and industry.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Sam Stovall, 